The Accounts Payable/Cash Disbursements (AP/CD) Process:
This Chapter presents the fourth business process, the accounts payable/cash disbursements (AP/CD) process. The AP/CD process includes the last two steps, invoice verification and payment processing, in the purchase-to-pay process.
In this chapter we will see the purchasing and receiving departments will interact internally with
- Departments within the organization making requests for the purchase of goods and services
- The accounts payable department who must pay for the purchased goods.
The accounts payable/cash disbursements (AP/CD) process is an interacting structure of people, equipment, methods, and controls that is designed to accomplish the following primary functions:
1) Handle the repetitive work routines of the accounts payable department and the cashier. (assuming these two departments are the primary operating units)
-Accomplished by capturing and recording data related to their day-to-day operations, such as recording vendor invoices and paying those invoices.The recorded data then may be used to generate source documents, such as disbursement vouchers and vendor payments, and to produce internal and external reports.
2) Support the decision needs of those who manage the accounts payable department and cashier.
-For example, the cashier might use an accounts payable aging report to plan cash availability and the cash disbursements manager might use a cash requirements forecast to help decide with invoices to pay next.
3) Assist in the preparation of internal and external reports.
-The process supplies the general ledger with data concerning various events related to the procurement activities of an organization. This data includes data related to accounts payable, the related expenses incurred or assets acquired, and the cash that is disbursed.
Organizational Setting A Horizontal Perspective: Relationship between the AP/CD process and its organizational environment.
Information flows generated or captured by the process:
1. Invoice received from vendor
2. Approved voucher sent to cashier
3. Accounts payable notification sent to general ledger process
4. Check sent to vendor by cashier
5. Paid voucher returned to the accounts payable department
6. Notification of the cash disbursement sent from the cashier to the general leger process
A Vertical Perspective:
The vertical perspective of the AP/CD process presents the agents responsible for the process in a hierarchal fashion. In this process, there is the accounts payable department who is responsible for processing invoices received from vendors, preparing payment vouchers for the subsequent disbursement of cash for goods and services received, and recording purchase and disbursement events. The cashier at the bottom of the hierarchy has custody of the cash and makes the payments authorized by the accounts payable department. In the vertical diagram on page 480 of our text, it is easy to see the relationship between the logistics and finance departments. The processes of order entry and shipping (logistics) work in conjunction with billing and cash receipts (finance) to complete the larger process. The two departments also share date with which the processes operate on a day-to-day basis and make important management decisions. From the logistics department, the warehouse manager uses purchasing data to schedule personnel to handle incoming shipments and provide storage space for the goods to be received. From the finance department, the controller uses the purchasing data to ensure that funds will be available to validate incoming vendor invoices. Therefore, the vertical perspective of the AP/CD process shows how different department work together and use each others' data and information to go about their respective tasks in an efficient manner.
Logical Process Description:
1) Establish Payable (invoice verification)
Vender invoice- a business document that notifies the purchaser of an obligation to pay the vender for goods or services that were ordered by and shipped to the purchaser.
Disbursement voucher- designed to reflect formal approval of the voucher for payment and to provide such added data as the account distribution and the amounts to be debited. Several invoices for a single vendor are often listed on one disbursement voucher so fewer checks are written during the cash disbursement procedure. This helps with the effectiveness goal of efficient employment of resources.
2) Make payment - the payment process is triggered by payment due-date information residing on the accounts payable master data and begins with the preparation of a check.
Most cash managers will attempt to optimize cash balances to help achieve another operations process effectiveness goal: to ensure that the amount of cash maintained in demand deposit accounts is sufficient( but no excessive) to satisfy expected cash disbursments.
This section includes discussion of exception routines and processing noninvoiced disbursements. Exception Routines:
Reject data flows occur for a number of reasons. Purchase returns and allowances frequently arise with respect to purchases. This exception routine usually begins at the point of inspecting and counting the goods or at the point of validating vendor invoices.
To initiate an adjustment for returned goods or for a price allowance in the case of otherwise nonconforming goods, someone usually prepares a debit memorandum and transmits it to the vendor; the vendor acknowledges it by returning a credit memorandum. The debit memo data also is transmitted to the account payable department. In the case of return, data also is made accessible to the sterioroom and shipping department. The shipping department's recording of the debit memo data also is made available to the accounts payable department.
Processing Noninvoiced Disbursements:
Examples of noninvoiced disbursements would be payroll, payroll taxes, corporate income taxes, rent, security investments, repayment of debt obligations and interest, etc.
Noninvoiced disbursements can be processed under two different assumptions:
A true voucher process is used in which all expenditures must be vouchered - that is, formally approved for payment and recorded as a payable - before they can be paid, and
a non-voucher process is employed.
The trigger for either process is a payment request from an originating dept. Upon receipt of the payment request, the processing in the voucher vs. non-voucher process varies primarily in the formality of the payment approval process.
In the voucher process, all payments for whatever purpose and no matter how small, are formally approved (vouchered), and then recorded as payables before they are paid.
In the non-voucher process, the payment also is approved and the account distribution is added to the request. However, the approval process is less formal than in the voucher process - no disbursement voucher document is prepared.
Logical Data Descriptions:
The AP/CD process entails several different data stores. As described in Chapter 12, The inventory master data, vendor master data, purchase requistions master data, purchase order master data, and purchase receipts master data. However, two additional data stores are:
Accounts Payable Master Data: This data store is a repository of all unpaid vendor invoices. The data design should consider how the data will be processed when the cash manager is deciding what payments to make.
For example: A manager may want to merge vendor invoices so the total amount can be accumulated. Alternatively, the manager might want to select specific invoices for payment.
Cash Disbursements Data: The purpose of this data is to show, in chronological sequence, the details of each cash payment made. Accordingly, each record in this data normally shows the date the payment is recorded, vendor identification, disbursement voucher number (if a voucher processed is used), vendor invoice number(s) and gross invoice amount(s), cash discount(s), taken on each invoice, net invoice amount(s), check amount, and check number.
Technology Trends and Developments
The AP/CD process is the primary candidate for EDI in major organizations. EDI usually results in significant cost savings, as illustrated in Technology application 13.1 in the book. Kaiser Permanente of Southern California switched to EDI for their patient care providers. They experienced 35 to 40 percent savings in instances where the provider only accepts checks and a greater savings where electronic funds transfers where used. Likewise, John Hancock Mutual Life INsurance CO. used EDI to increase effeciency and to decrease rising need for increased staffing. An increasing trend among some major companies, such as Wal-mart, requires all vendors to use EDI in their transactions otherwise the companies will replace those vendors without EDI with new vendors. Refer back to Ch 3, several alternatives to EDI have been developed, for example XML and IP-based EDI, but they have not replaced EDI due to the high degree of EDI standardization.
Fraud and the AP/CD Function
AP Fraud usually involves creating phony vendors and/or submitting fictitous invoices. Some examples include: A dishonest employee who has access to the vendor file and authorizes payment, embezzeling funds returned by vendors, etc. Link to a description of a software that can reduce A/P fraud as well as reduce errors, improve productivity, and reduce cycle times.
CD Fraud is more direct and less subtle- it usually involves check forgery or fraudulent wire transfers. CD Fraud is becoming easier and more common with computer duplication technology: for example, company checks can be counterfeited using a laser scanner, a personal computer, and a color printer, whereas before the advent of computers, fraud committed using bogus corporate checks required that the thief steal a supply of blank checks. Counterfitting of currency has become an operation that can be easily performed using a desktop computer. Perfect replicas can now be generated by cheap color ink jet printers.
The movie "Catch Me if You Can" provides a key insight into how check fraud can be perpetrated. The FBI now has stricter laws and regulations on the matter.
Resource loss due to unintentional mistakes and human error are also extremely costly, sometimes even more costly then fraudulent action. Examples include making payments without a purchase order to verify correct billings, duplicate invoice payments, additional costs in re-processing and requesting refunds.
Although the subject of fraud and embezzlement is seductively interesting, resource losses due to unintentional mistakes and inadvertant errors are as costly as, or more costly than those caused by intentional acts of malfeasance.
Exs: Making payment for incorrect or larger amounts, Paying the wrong vendor, Paying the same invoice twice.
One major source of loss regarding the AP/CD process is the overpayment of accounts payable, usually caused by simple human errors. These errors are reduced with the comparison of a bill to its related purchase order. Verifying that the dollar amounts and vendor's name are correct on the invoice also helps to avoid paying the same invoice twice or overpaying the vendor.
Micah's Horizontal view (this is extremely abreviated. do not rely only on for study)
1. vendor invoices
2. voucher sent to cashier
3. A/P send not to GL
4. cashier writes check
5. tells A/P
6. tells GL
The Accounts Payable/Cash Disbursements (AP/CD) Process:
This Chapter presents the fourth business process, the accounts payable/cash disbursements (AP/CD) process. The AP/CD process includes the last two steps, invoice verification and payment processing, in the purchase-to-pay process.In this chapter we will see the purchasing and receiving departments will interact internally with
- Departments within the organization making requests for the purchase of goods and services
- The accounts payable department who must pay for the purchased goods.
The accounts payable/cash disbursements (AP/CD) process is an interacting structure of people, equipment, methods, and controls that is designed to accomplish the following primary functions:
1) Handle the repetitive work routines of the accounts payable department and the cashier. (assuming these two departments are the primary operating units)
-Accomplished by capturing and recording data related to their day-to-day operations, such as recording vendor invoices and paying those invoices.The recorded data then may be used to generate source documents, such as disbursement vouchers and vendor payments, and to produce internal and external reports.
2) Support the decision needs of those who manage the accounts payable department and cashier.
-For example, the cashier might use an accounts payable aging report to plan cash availability and the cash disbursements manager might use a cash requirements forecast to help decide with invoices to pay next.
3) Assist in the preparation of internal and external reports.
-The process supplies the general ledger with data concerning various events related to the procurement activities of an organization. This data includes data related to accounts payable, the related expenses incurred or assets acquired, and the cash that is disbursed.
Organizational Setting
A Horizontal Perspective: Relationship between the AP/CD process and its organizational environment.
Information flows generated or captured by the process:
1. Invoice received from vendor
2. Approved voucher sent to cashier
3. Accounts payable notification sent to general ledger process
4. Check sent to vendor by cashier
5. Paid voucher returned to the accounts payable department
6. Notification of the cash disbursement sent from the cashier to the general leger process
A Vertical Perspective:
The vertical perspective of the AP/CD process presents the agents responsible for the process in a hierarchal fashion. In this process, there is the accounts payable department who is responsible for processing invoices received from vendors, preparing payment vouchers for the subsequent disbursement of cash for goods and services received, and recording purchase and disbursement events. The cashier at the bottom of the hierarchy has custody of the cash and makes the payments authorized by the accounts payable department. In the vertical diagram on page 480 of our text, it is easy to see the relationship between the logistics and finance departments. The processes of order entry and shipping (logistics) work in conjunction with billing and cash receipts (finance) to complete the larger process. The two departments also share date with which the processes operate on a day-to-day basis and make important management decisions. From the logistics department, the warehouse manager uses purchasing data to schedule personnel to handle incoming shipments and provide storage space for the goods to be received. From the finance department, the controller uses the purchasing data to ensure that funds will be available to validate incoming vendor invoices. Therefore, the vertical perspective of the AP/CD process shows how different department work together and use each others' data and information to go about their respective tasks in an efficient manner.
Logical Process Description:
1) Establish Payable (invoice verification)2) Make payment - the payment process is triggered by payment due-date information residing on the accounts payable master data and begins with the preparation of a check.
Most cash managers will attempt to optimize cash balances to help achieve another operations process effectiveness goal: to ensure that the amount of cash maintained in demand deposit accounts is sufficient( but no excessive) to satisfy expected cash disbursments.
This section includes discussion of exception routines and processing noninvoiced disbursements.
Exception Routines:
Reject data flows occur for a number of reasons. Purchase returns and allowances frequently arise with respect to purchases. This exception routine usually begins at the point of inspecting and counting the goods or at the point of validating vendor invoices.
To initiate an adjustment for returned goods or for a price allowance in the case of otherwise nonconforming goods, someone usually prepares a debit memorandum and transmits it to the vendor; the vendor acknowledges it by returning a credit memorandum. The debit memo data also is transmitted to the account payable department. In the case of return, data also is made accessible to the sterioroom and shipping department. The shipping department's recording of the debit memo data also is made available to the accounts payable department.
Processing Noninvoiced Disbursements:
Examples of noninvoiced disbursements would be payroll, payroll taxes, corporate income taxes, rent, security investments, repayment of debt obligations and interest, etc.
Noninvoiced disbursements can be processed under two different assumptions:
- A true voucher process is used in which all expenditures must be vouchered - that is, formally approved for payment and recorded as a payable - before they can be paid, and
- a non-voucher process is employed.
The trigger for either process is a payment request from an originating dept. Upon receipt of the payment request, the processing in the voucher vs. non-voucher process varies primarily in the formality of the payment approval process.In the voucher process, all payments for whatever purpose and no matter how small, are formally approved (vouchered), and then recorded as payables before they are paid.
In the non-voucher process, the payment also is approved and the account distribution is added to the request. However, the approval process is less formal than in the voucher process - no disbursement voucher document is prepared.
Logical Data Descriptions:
The AP/CD process entails several different data stores. As described in Chapter 12, The inventory master data, vendor master data, purchase requistions master data, purchase order master data, and purchase receipts master data. However, two additional data stores are:
Accounts Payable Master Data: This data store is a repository of all unpaid vendor invoices. The data design should consider how the data will be processed when the cash manager is deciding what payments to make.
For example: A manager may want to merge vendor invoices so the total amount can be accumulated. Alternatively, the manager might want to select specific invoices for payment.
Cash Disbursements Data: The purpose of this data is to show, in chronological sequence, the details of each cash payment made. Accordingly, each record in this data normally shows the date the payment is recorded, vendor identification, disbursement voucher number (if a voucher processed is used), vendor invoice number(s) and gross invoice amount(s), cash discount(s), taken on each invoice, net invoice amount(s), check amount, and check number.
Technology Trends and Developments
The AP/CD process is the primary candidate for EDI in major organizations. EDI usually results in significant cost savings, as illustrated in Technology application 13.1 in the book. Kaiser Permanente of Southern California switched to EDI for their patient care providers. They experienced 35 to 40 percent savings in instances where the provider only accepts checks and a greater savings where electronic funds transfers where used. Likewise, John Hancock Mutual Life INsurance CO. used EDI to increase effeciency and to decrease rising need for increased staffing. An increasing trend among some major companies, such as Wal-mart, requires all vendors to use EDI in their transactions otherwise the companies will replace those vendors without EDI with new vendors. Refer back to Ch 3, several alternatives to EDI have been developed, for example XML and IP-based EDI, but they have not replaced EDI due to the high degree of EDI standardization.
Fraud and the AP/CD Function
AP Fraud usually involves creating phony vendors and/or submitting fictitous invoices. Some examples include: A dishonest employee who has access to the vendor file and authorizes payment, embezzeling funds returned by vendors, etc.
Link to a description of a software that can reduce A/P fraud as well as reduce errors, improve productivity, and reduce cycle times.
CD Fraud is more direct and less subtle- it usually involves check forgery or fraudulent wire transfers. CD Fraud is becoming easier and more common with computer duplication technology: for example, company checks can be counterfeited using a laser scanner, a personal computer, and a color printer, whereas before the advent of computers, fraud committed using bogus corporate checks required that the thief steal a supply of blank checks. Counterfitting of currency has become an operation that can be easily performed using a desktop computer. Perfect replicas can now be generated by cheap color ink jet printers.
The movie "Catch Me if You Can" provides a key insight into how check fraud can be perpetrated. The FBI now has stricter laws and regulations on the matter.
Resource loss due to unintentional mistakes and human error are also extremely costly, sometimes even more costly then fraudulent action. Examples include making payments without a purchase order to verify correct billings, duplicate invoice payments, additional costs in re-processing and requesting refunds.
Although the subject of fraud and embezzlement is seductively interesting, resource losses due to unintentional mistakes and inadvertant errors are as costly as, or more costly than those caused by intentional acts of malfeasance.
Exs: Making payment for incorrect or larger amounts, Paying the wrong vendor, Paying the same invoice twice.
One major source of loss regarding the AP/CD process is the overpayment of accounts payable, usually caused by simple human errors. These errors are reduced with the comparison of a bill to its related purchase order. Verifying that the dollar amounts and vendor's name are correct on the invoice also helps to avoid paying the same invoice twice or overpaying the vendor.
Micah's Horizontal view (this is extremely abreviated. do not rely only on for study)
1. vendor invoices
2. voucher sent to cashier
3. A/P send not to GL
4. cashier writes check
5. tells A/P
6. tells GL